Taking a Long-Term and a Short-Term View

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Sometimes it’s wise to sacrifice immediate profits to build market share in the future. 

Company executives remain under pressure from investor activists, institutional holders and equity analysts to deliver earnings, pay dividends and buy shares back now — this year or even this quarter. The continuing intensity of those near-term calls comes as no surprise, as hedge funds have amped up their megaphones, active investors trade more frequently and equity analysts are ever put off by more immediate shocks. 

But an inside source may also be adding to that outside drumbeat, even if inadvertently: the governing board. Two-thirds of the chief executives in one survey affirmed that the greatest single demand for near-term results actually came from their own directors. Yet, if so, how can that be? Isn’t the polar opposite — long-term thinking — also one of a director’s callings, a raison d’être for serving on a governing board in the first place? Or, as one chief executive summed it up in Go Long: Why Long-Term Thinking Is Your Best Short-Term Strategy, the book I wrote with Dennis Carey, Brian Dumaine and Rodney Zemmel, shouldn’t directors be making “bets” that “last longer than any CEO”?

While I heartily concur with the long-term pleas and I believe that most directors do so as well, I am also mindful that we all sometimes run up against a shortfall in the human condition well-documented by university researchers. Stanford University’s Jeffrey Pfeffer and Robert Sutton caution against “the knowing-doing gap,” where we do not always translate what we hold dear into what we actually do. Nobel Prize winner Daniel Kahneman similarly counsels against an overreliance on “intuitive thinking” and favors also incorporating “deliberative thinking,” a disciplined pathway to more distant goals.

Directors are therefore wise to ask themselves whether their actions are indeed going to actually champion both long and short performance, especially when the latter overshadows the former. Directors, secondly, will be sensible to partner closely with executives in doing so, since both are called to do so. And thirdly, directors and executives will be better equipped to collaborate on both if they have examples to guide their own actions, learning for themselves from the experience of others. 

To illuminate this three-part agenda for going short and long, we focus on the decision of CVS, America’s largest pharmacy and convenience store chain, to banish tobacco products from its shelves. This board-sanctioned action plan may be particularly instructive, since the firm’s long-term agenda occasioned significant near-term losses.


Short-Term Sales and Long-Term Value

As chief executive of CVS since 2011 and a graduate of the University of Pittsburgh School of Pharmacy, Larry Merlo knew that the continued sales of tobacco products in his stores were important for his firm’s short-term earnings. But he also concluded that those close-in benefits were becoming an albatross, since he and his directors had concluded that the firm’s long-term prosperity would best come through redefining itself as a healthcare provider. 

The firm was already huge, with annual revenue running more than $175 billion, and it was well on its way to promoting health as much as providing convenience. In 2007, CVS acquired Caremark, the country’s leading pharmacy-benefits management company that helped firms keep health costs down through preventive care, a long-term proposition itself. “We have a lot of clients counting on us to help keep their employees healthy,” reported Merlo, and he had concluded that, in the long run, CVS would grow more from its health services than from its convenience products. 

As an early test of concept, CVS had created mini clinics, where nurse practitioners could check blood pressures and administer vaccinations, in its stores. The back-of-store clinics were proving successful but not enough to stem growing criticism from medical centers, benefit managers and walk-in customers about the tobacco products on display at the front. Was CVS becoming a convenience store that housed a pharmacy in the back, or a pharmacy that displayed snacks at the front? 

Larry Merlo appreciated that the company’s mission statement at the time was not much help in resolving the question, and he formed an executive team to perfect its thrust. The resulting line: The company’s purpose was “to help people on their path to better health” and, though sharply edged, even the head of tobacco sales was ready to embrace it. Getting rid of cigarettes, he told the CEO, was “the right thing to do.”

Bringing the Board on Board

Before removing tobacco, however, the CVS chief executive knew that the decision would have to be backed by the board. His top team had calculated that it would annually cost the stores $1.5 billion in forgone tobacco sales and another $500 million in other products that cigarette buyers grab before checking out. On the premise that an enduring partnership for pursuing long-term gains despite short-term losses would depend on personal relations with the directors, Merlo consulted them before asking the board to endorse the scheme. 

The chief executive set forward his no-tobacco plan at a 2014 board meeting, explaining that the short-term annual loss of $2 billion would be worth absorbing now if the firm was to brand itself later as a healthcare provider. The board’s receptiveness was enhanced by directors already known for their longer-term mindsets. Board chair David Dorman, for instance, was a cofounding partner of Centerview Capital Technology, a private-equity firm known for a patient investment style.
Even then, given the conflicting stakes, Merlo reported that he entered the board meeting a “nervous wreck.” But his anxieties proved misplaced, since all of the directors endorsed the plan and some even stepped forward with advice on how to execute it. One director, Tony White, who had served as chief executive of Applied Biosystems, a maker of life science products, told the CEO “not to be shy about telling the tobacco story to the world.” Merlo messaged his employees, launched a social media campaign and gave interviews with major print media, including The New York Times and The Wall Street Journal. He also made a point to announce the tobacco decision during a quarter with otherwise strong financial results, cushioning the expected slowing of the firm’s growth. 

At first, the investment community was not impressed, driving CVS’s stock down by 7%, but Merlo persisted. On quarterly calls, he shared with analysts how tobacco sales were a barrier to growth. He allowed that the company was not going to lose a dollar on tobacco and make up for it elsewhere in the months ahead. But he was confident that the company would eventually make it up with a healthcare brand. Merlo eventually won over most of his investors on the presumption that the immediate losses would indeed be more than made up for later. 

In telling the company story, Merlo found that nearly everyone had their own story about how tobacco had afflicted them or someone they knew. Anti-smoking groups chimed in: “CVS’s announcement to stop selling tobacco products,” said the president of the Campaign for Tobacco-Free Kids, “sends a resounding message to the entire retail industry and to its customers that pharmacies should not be in the business of selling tobacco.”
The chief executive and his directors continued their long-term agenda to reposition CVS Health as a healthcare provider, acquiring Aetna Inc., one of the country’s largest health insurers. CVS removed trans fats from its store-brand foods, shifted healthier foods to the front of its outlets and labeled sections as “heart healthy” or “gluten free.” 

The Board’s Long Roadmap

The end of tobacco at CVS hit near-term earnings, as expected, but enhanced far-term reputation, as anticipated. In Merlo’s own words: “In the end, I think banning cigarette sales serves as a constant reminder for us of that balance between short-term actions and long-term thinking.” Immediate losses should not obscure the bigger goals ahead.

Based on the CVS experience, here is a brief roadmap for directors working to balance both the short and the long, producing now while also planning for later: 

  • Recruit board members with a record of both short- and long-term leadership experience and personal commitments. Ask board candidates to describe a past decision in which they took both into account. 
  • Build a boardroom mentality that calls for monitoring and partnering with management and with both time frames in mind. Add short- and long-term criteria to the annual evaluation of the board and its members. 
  • Bring the future into the present during boardroom deliberations. Ask what needs to be done this year to ensure that both near-term results and long-term goals will be achieved.
  • Select a CEO who has a demonstrated talent for growth and results both this year and a decade out. 

Michael Useem is faculty director of the Leadership Center and McNulty Leadership Program at the Wharton School of the University of Pennsylvania, and he is coauthor of Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way.

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